What Is A Non-Profit?(May
28, 2007) I had a really weird conversation with a guy who sold the assets of a
non-profit and made money in the transaction. I always thought that the assets
of a non-profit organization were the property of the State. He assured me that
he was able to sell off assets of the non-profit because he "had put some of his
own money into the game" and "had the approval of his board of directors".

A non-profit organization (often called
"non-profit org" or simply "non-profit" or "not-for-profit") is an
organization whose primary objective is something other than the generation
of profit. Such organizations are typically funded through a mix of private
or public (ie. government) donations (Google)

Call me a cynic. I've always assumed that the
only difference between a for-profit organization and a not-for-profit
organization was simple. One made a profit and the other didn't. I never assume
that the term "not-for-profit" and "charitable organization" are the same thing.
This fellow's story about being able to liquidate non-profit assets simply
underlined and reinforced my bias.

It nagged at me to the point that I needed to dig
a little further. I want to underline the fact that I am exploring my
understanding. I hardly have a perfectly clear picture hear. I just have some
personal biases and assumptions that I want to hold up to the light.

It turns out that many state governments
distinguish between public benefit oriented organizations and mutual benefit
organizations. Your contributions to a charitable organization are
tax-deductible only if that group qualifies for 501(c)(3) status.
Otherwise, it's probably not interested in public benefit. Both are non-profits.

You know about some forms of mutual benefit
organization. Golf-clubs and country clubs are often organized this way. They
are not-for-profit but are hardly interested in things that would qualify as
charitable. There are others. The thing that runs through them all is that they
are interested in the welfare of the membership.

That's a great guideline. If charitable
organization does not have
501(c)(3) status,
anything they tell you about working for the "larger good" is very suspect.
Being a non-profit does not inherently mean that the organization is pursuing a
nobler cause. In many cases, though it's not supposed to be the way things are
done, being a non-profit is simply a way to line the pockets of the management
team.

A not-for-profit organization can not hold
profits. These are usually distributed to the management of the group. Thus,
rather than retaining the earnings and reinvesting them or returning them to
stockholders (the basic accountability in a for-profit organization), bigger
paychecks and fatter expense accounts are the hallmark of many non-charitable
non-profits.

The 501 (c)(3) designation is a pretty important
distinction. Without it, you can't know exactly what you are dealing with.

Outside of that simple distinction (is it
charitable or not), the differences between a for profit and not-for profit seem
simple:

For Profit

Non Profit

Assets

Owned By The Shareholders

Owned By The State

Profits

The Goal

Not Allowed

Enrichment

The Shareholders

The Public (Charitable)
The Members (Not Charitable)

In neither case (profit or non-profit) is the
enrichment of the management team an intended outcome. For more information, see